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 1. Dot Your i's And Cross Your t's Audit your own return before you send it in. If the IRS computer finds mistakes, you are more likely to be audited. They figure that if they can find obvious mistakes, there may be some less-than-obvious errors as well. Check your math, make sure your social security number and address are correct (especially if using a pre-printed label), and sign your return. |
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| 2. Declare All Your Income Be sure to report ALL your income. Double check W-2s and 1099s for accuracy against monthly financial statements or other records. If the IRS determines that you have reported less income than they have received reports for, your return is certain to attract attention. Remember, the failure of a company to send you a 1099 does not relieve you of the responsibility to report the income. They may have reported to the IRS while your copy of the 1099 was lost in the mail or sent to a wrong address. If you have not received all your 1099s and W-2s by January 31st, call the company and request a reissue of the forms. |
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| 3. Be Careful With Hobby Losses If you have a sideline business where you try to make a few extra C-notes, be careful about reporting losses year after year. Sole proprietors reporting consecutive losses on Schedule C are usually most at risk of an audit. There is no set rule, but if you try to claim a loss for more than 3 years without ever reporting a profit, the IRS is more likely to consider that you do not have a true motive for profit. They could disallow the loss, along with all of your hard-earned business deductions. |
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| 4. Don't Itemize, And Be Honest If You Do People who itemize their deductions on Schedule A are far more likely to be audited because they have more opportunity to cheat. If you can legally claim the deductions, then I completely advocate itemizing, just don't artificially inflate your deductions. If you don't have a lot of deductions and itemizing gets you very little additional tax relief, then claim the standard deduction. At least the IRS cannot challenge that! |
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| 5. Don't Be A Non-Filer This one never ceases to amaze me. Just like Christmas and your birthday, April 15th WILL arrive every year, so don't try to avoid it. If you don't have the time or money (or either) to file your taxes, then at least attempt one of the two. If you lack time, file an extension or hire someone to prepare them for you. If you lack the money, at least file a return even if you can't send a check. Failure to file a return can result in criminal charges and fines when the IRS catches up to you. Failure to include enough money with a properly filed return will usually only result in accrued interest on top of the tax you owe, and a few unpleasant letters from the IRS. There are limits to the IRS' "sympathy and understanding" but if you don't blatantly abuse taking extra time to pay, chances are you will only have to pay the interest and not find yourself sitting across the table from a stern-looking IRS examiner who already probably doesn't like you! |
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| 6. Don't Cheat even a little bit. This may sound obvious to some, but the IRS' computers are programmed to look for the most common ways people cheat. And while you may intend to be an upstanding taxpayer, ignorance to the tax code does not excuse lack of compliance! Also, the IRS routinely pays rewards to informants, so if you insist on bending the rules and do manage to get away with it, be careful who is listening when you boast of your great prowess at out-smarting Uncle Sam. |
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| 7. Avoid Dubious Refund Schemes This advice does not apply to the majority of tax preparation firms, but unfortunately there are companies who fabricate returns in the name of promising you the highest possible refund. Be wary of anyone who claims they have "little known" or "creative" methods to increase your refund, or that charge you based on the amount of refund they recover. About the only thing "bigger" they can promise you is the probability of audit! |
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| 8. Earn Less Money Seriously! Affluence is not without cost. If you work a second job to fund that international vacation or 50-footer that is moored at the yacht club, consider the tax cost as well. In addition to higher marginal tax rates, if you earn over $100,000 a year, you have roughly a 1 in 5 chance of being audited. By comparison, those earning a menial $50,000 per year have a statistical probability of only about 1 in 20 for an audit. |
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| 9. Don't Cut Corners If Self-Employed Self-employed people have more opportunity to make mistakes, or to creatively take deductions, than do their 9-5 wage-earning brethren. You must be certain not only of the accuracy of the income you report, but also the expenses. You have to be even more honest when dealing with the tax authorities, because your likelihood of an audit is much greater. |
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| 10. Wish Upon A Star No, I didn't just run out of ideas, this is a bonafide tip! Every year the IRS audits thousands of taxpayers, otherwise known as random compliance checking. You may have the most perfectly and honestly prepared return ever known to the Tax Gods, but if they draw you're number, it's still your unlucky day! Not that an audit is necessarily any worse than a root canal, especially if you have the required documentation to substantiate your return, but it is still not something I would wish on my worst enemy either. So remember, just the mere receipt of an audit notice does not necessarily infer wrong doing, but be prepared to answer questions at length about even seemingly minor details. The bottom line: Copious record keeping and a good dose of ethics will never let you down! |
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